Semiconductors and trade: Where micro meets macro

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 American Funds video transcript: “Semiconductors and trade: Where micro meets macro”

Mike Utley: How does this new environment of global trade disputes impact semiconductor companies, which are probably among the most global companies in the marketplace?

Isaac Sudit: I've been at Capital 13 years, and this is something that's been talked about internally for 13 years at least, probably before I got here. There are short-term and long-term issues, right? And the way to think about it is, semiconductors are like oil. Oil was viewed as a geopolitical issue in the ‘70s — actually much earlier, but it came to the forefront in the ‘70s and then ‘80s. We went through an embargo in the late ‘70s, and I think people kind of realized that this is a commodity that has implications globally.

Mike Utley: Right.

Isaac Sudit: And I think that's how semiconductors are. Semiconductors are not only drivers of industries, [but also] are drivers of military applications we're seeing in national security. So, it should not come as a surprise that this is going to be part of our trade disputes.

Mike Utley: Right.

Isaac Sudit: China has viewed as unacceptable the fact that it depends on other countries for its semiconductor needs. And it has for many, many years tried to correct this situation. The Chinese leadership clearly wants to develop a semiconductor industry, and they view this as of national importance. And they will do so.

It's going to take several years, probably decades. During that period, I suspect that the Chinese economy is going to become closer and closer, and less open to technology companies from the U.S. And I think that eventually, no matter how much we argue where the intellectual property comes from, the realities on the ground will determine how we maintain a relationship. And eventually, they'll have a semiconductor industry — and we'll have to accept it — in some way, shape or form. This will take many, many, many years. But I think that over the next several years, if not decades, we should expect some kind of adversarial relationship between us and China regarding semiconductors.

Mike Utley: Ah.

Isaac Sudit: It will be something that will probably depress growth, and it's something that I think will be temporary. But it will be clouding the industry for many years to come. 

Mike Utley: OK, so this is not a dispute that you see being resolved amicably really soon?

Isaac Sudit: I think that it will be resolved soon in the media, and there will be an understanding. But in terms of business practices, I think that there will be an underlying tension that will take many, many years to ease to a new equilibrium. We are coming from an equilibrium that existed — that was perceived as an equilibrium — which truly was unacceptable to governments in the West.

Mike Utley: Right.

Isaac Sudit: But it was viewed by the public as an equilibrium, and now we are going to head to another equilibrium. But in that transition period, I think it's going to be somewhat disruptive.

Mike Utley: Right, right. So, as an analyst who might not necessarily delve into politics as much, how do you incorporate that into your analysis of a company? How does it play into the way you look at companies in this industry?

Isaac Sudit: Well, as analysts we need to consider various scenarios, and then we determine how probable they are.

Mike Utley: Sure.

Isaac Sudit: But at the beginning, we need to discuss what is possible. And of course, all these geopolitical tensions and these trade issues are adding potential scenarios that now we need to incorporate. Maybe they were not first-order outcomes that I needed to worry, and given that we have a limited amount of time, we have to determine what's first order, what's second order, what's third order.

Mike Utley: Right.

Isaac Sudit: So, in the past, such issues were not really first-order issues.But now they are.

Mike Utley: Yeah.

Isaac Sudit: So, as an analyst, I need to educate myself and get a sense of what the impact could be of such issues on the potential outcomes to the companies that I invest [in] or we recommend that we invest in.

Mike Utley: Right.

Isaac Sudit: So, to your question, am I becoming an expert on this? I'm becoming an expert more than I used to. I don't think I'll ever be an expert, but it's an issue that now requires more of my attention than in the past.


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U.S.-China trade tensions will have a significant, long-term impact on the semiconductor industry, says investment analyst Isaac Sudit.